I love the 2001 Honda Accord I bought used a few years ago. I especially love having it paid for.

So when a friend recently asked me whether she should buy a new car, now that her current one is paid off, you can guess what I wanted to immediately recommend.

One advice doesn't fit all
But I realize that holding on to a great car doesn't always work for everyone, so I made sure to ask my friend the following questions:

  • Has your lifestyle changed, with the addition of kids or a pet?
  • Do you want to buy a more fuel-efficient car?
  • Are the repairs and upkeep costs burdensome?
  • Do you feel unsafe driving a Lilliputian car among all the giant SUVs out there?

Answering "yes" to any of these questions could be a good reason for buying a new car. But if you're simply being tempted by the enticing new-car ads from the likes of Ford (NYSE:F) and Toyota (NYSE:TM), with their flashy promises of built-in features like satellite radio and navigation systems, you may want to think twice before trading in your paid-off gem.

What to do with your savings
The best part of fully owning a car is that you get to pocket the cash that previously went to the bank each month. Now, instead of paying your lender, you can pay yourself.

Even if you hang on to your paid-off car for only six extra months, you could save anywhere from $1,000 to $3,000 during that period, depending on your monthly payments. That sum could put a big dent in any existing credit card debt, start a college savings fund for Junior, or even pay for a much-deserved vacation.

In this Fool's opinion, after you pay down your high-interest credit card debt, the best thing to do with the extra monthly cash flow is to fund an IRA for your retirement. After all, the last thing you want is to have a gruesome retirement and not be able to maintain your current lifestyle in your golden years.

If you have more than seven years until retirement, consider sticking that IRA money into a low-cost, diversified stock mutual fund, like the Vanguard Total Stock Market Index, which seeks to track the performance of the overall U.S. market and holds stocks such as Chevron (NYSE:CVX), General Electric (NYSE:GE), and Johnson & Johnson (NYSE:JNJ).

Consider the alternative
Before trading in your paid-off car for a new one, be sure to honestly ask yourself why you want a new car, and how it might affect your finances. Remember that a new car also means a new loan and probably higher monthly payments to boot.

If you have a great car that still runs well and fits your lifestyle, hang on to it! Not only can it be financially smart, but the satisfaction of driving and maintaining a car for more than 100,000 miles can also be rewarding.